The mergers and acquisitions (M&A) market experienced uncertainty in 2023 and a recent Deloitte’s 2024 M&A Trends Survey revealed dealmakers are feeling optimistic about a rebound in the coming year. Navigating M&A deals is incredibly complex and both buyers and sellers need protection to manage the risks that accompany these transactions.
Corporate transactions are full of uncertainties that can impact the financial outcome. Representations are made in the transaction process that can lead to liability down the road. There can be issues that are overlooked in the due diligence process.
Any company considering a merger or acquisition should consider the risks of aligning with an unknown entity. Representations and Warranties (R&W) insurance can be an important risk transfer product to consider including in your transaction process.
In most M&A transactions, there is an escrow or an amount of money representing a percentage of the transaction that has a delayed distribution to cover issues that arise in the first few years following the transaction. Representations & Warranties insurance products often take the place of the escrow and accelerate the financial distributions. These R&W products are customized to each transaction allowing for a bespoke policy that fits perfectly.
Is Representation & Warranties Insurance Right for You?
If you are contemplating a corporate transaction, merger, or acquisition, R&W insurance might be right for you. Representation & Warranties insurance is often purchased at the time of the sale of a company or similar transaction. It is a specific type of transactional risk insurance designed to cover breaches of representation and warranties in the transaction agreements.
Representation & Warranties insurance can be purchased in the name of the buyer or seller of the company. It is most often elected by the buyer, what is referred to as a “buy-side” policy. This coverage addresses the risks to the buyer in the purchase. Policies can also be purchased strictly to benefit the seller, although this is less common.
Pricing is based on the value of the transaction and the limit of the policy. An underwriting fee is also generally assessed by the insurance carrier. While R&W is often used in large (over $150M) and mid-sized transactions (over $50M), smaller transactions (under $20M) can be covered by some of the newer products now available in the marketplace.
Don’t forget that a Directors & Officers (D&O) run-off (or Tail) policy is important to help to bridge the gap between legacy liabilities and what would be covered by Representation & Warranties insurance. For large and complex transactions R&W insurance is highly recommended in addition to the D&O tail policy.
Navigate Your Risk During a Merger or Acquisition With the Experts
When you’re preparing for a merger, acquisition, or complex corporate transaction, the last thing you want to worry about is unforeseen risk. Representation & Warranties insurance can help, and you’ll want to work with an experienced broker you can guide you through the process. That’s where we come in.
Holmes Murphy is home to a talented team of experts with extensive experience in placing transactional risk policies like R&W insurance. Our network of strategic partners and access to top markets throughout the industry mean that we meet needs on your deadline. Have questions about R&W insurance or other transactional risk? Reach out today and let’s talk!